6 Top Factors that affect Credit Score Negatively

6 Top Factors that affect Credit Score Negatively

A good credit score provides a borrower with numerous advantages, such as negotiating power, desired loan amount, priority over other applicants (when compared to applicants with a low or fair credit score), and a lower rate of interest. In contrast, a low credit score is a reason for the rejection of multiple loan applications, as well as a higher rate of interest, among other things! As a result, it is critical to understand the severity of a bad credit score and the factors that affect it negatively.

What are the Factors that affect Credit Score Negatively?

Considering the importance of credit score for a user’s credit rapport, it is important to get rid of all the factors that affect credit score negatively, if there are any. If they are not resolved well in time, they can create a never-ending loop that leads to loan application rejections, hard inquiries and a further lower credit score. So, in order to be aware of these factors and avoid them, we have listed some of the possible factors that have a negative impact on credit scores-

Irresponsible Payment History

One of the major factors that have a negative impact on the credit score is an irresponsible credit repayment history. It demonstrates the borrower’s inability and irresponsible behaviour towards the payment of loan EMIs and credit amounts. Sometimes, it may even take years to improve/regain the credit score.

Solution- It is recommended that debts be paid off on time. If a borrower is unable to manage credit payments for any valid reason, he or she can contact the concerned authorities and request a grace period.

High Credit Utilization Ratio

It is recommended that only 30% of the total credit amount be used. A borrower who uses more than the specified percentage of his/her CUR demonstrates his/her reliance on credit, resulting in a lower credit score.

Solution- Borrower should manage to use the credit utilization ratio judiciously. n the event that the borrower’s credit requirements are higher, he or she can contact the relevant lenders, banks, or financial institutions to request a higher credit amount. However, the use of only 30% of the credit utilisation ratio is still applicable on larger credit amounts.

Unpaid Credit Amount

Credit payments that are late, missed, unpaid, or partially settled all result in a lower credit score. Such payments are reflected in the credit report and can hinder the loan or credit card approval process.

Solution- It is a good idea to set reminders for loan EMIs and credit payment due dates. If the borrower has an outstanding credit balance, the outstanding amount can be converted into simple EMIs. This way, he can avoid becoming overburdened. Also, if a borrower prefers to pay by cheque, he should make sure to deposit the cheque a few days before the due date.

Credit Report Errors

A credit report is the collection of a borrower’s credit history and credit repayment behaviour obtained from banks, lenders, and financial institutions. Any error, issue, or comment on a credit report can have a significant impact on the borrower’s credit score.

Solution- If there is an issue or error in the credit report, it is critical to file a dispute with the concerned authorities as soon as possible. It is also recommended that credit reports be reviewed at least twice a year.

Hard inquiries

Lenders conduct hard inquiries whenever a borrower applies for a new loan or credit. These inquiries show the borrower’s multiple attempts to obtain a loan or credit card over a specific time period. Frequent hard inquiries have a significant impact on the credit score and can significantly lower it.

Solution- Borrowers should avoid making multiple credit inquiries, at least within a certain time frame. It is advised to wait sometime before applying for another loan.

No Credit Mix

A borrower’s inability to maintain a balance between secured and unsecured loans can also result in a negative credit score.

Solution- A good credit mix is essentially a healthy balance of secured and unsecured loans. As a result, a borrower should figure out how to manage both types of loans or consult with an expert for more information.

How to Improve Credit Score?

The following are a few possible ways to improve credit score; however, it is important to note that these methods will not work overnight. Improving or regaining a good credit score takes time.

  • Make your credit card payments on time every month
  • Do not leave any unpaid credit balances
  • Maintain a proper balance of secured and unsecured loans
  • Make sure to use the credit utilization ratio judiciously
  • Resolve the credit report errors
  • Do not apply for a loan or credit card immediately after an application has been rejected
  • Set up timely reminders for loan EMIs and credit card monthly payments
  • Make certain that no partially settled amount or minimum balance is left

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FAQs
What are the most common factors that influence a person’s credit score?
Among the many factors that affect credit score are late or missed payments, half-settled payments, numerous hard inquiries, and a higher credit utilisation ratio.
How can I get a credit score of 900?
To achieve a credit score of 900, you must pay your debts on time, avoid making frequent credit inquiries, use 30 percent of your credit limit, and resolve any comments or errors on your credit report.
Is 800 a good credit score for purchasing a home?
A credit score ranging from 750 to 900 is considered excellent. An applicant with a credit score within the given range often qualifies for faster loan approval.
What are the advantages of having a higher credit score?
Borrowers with excellent credit are given preference over applicants with poor or fair credit. Apart from that, a borrower can receive numerous benefits such as a lower interest rate on the loan, negotiating power, the desired loan amount, access to rewarding credit cards, and so on.
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